Listed companies’ outbound investments become more rational
2017-08-20, Source: Xinhua News Agency
Xinhua News Agency, Shanghai, August 20 (Reporter: He Xinrong) - Sanyuan and Fosun Group have jointly acquired French health food company St-Hubert, Fosun as the controlling shareholder of Nanjing Iron and Steel, has acquired German enterprise Koller engaged in the lightweight design of cars, while Hytera has acquired Canadian satellite technology company Norsat. A-share listed companies have also announced a series of outbound investments, indicating the overseas investments made by Chinese enterprises have become more rational.
Foreign M&A investments represent an awe-inspiring phenomenon in China’s economy over the past two years. As reported by PricewaterhouseCoopers (PwC), the overseas investments and M&A conducted by Chinese enterprises in 2016 amounted to US$221 billion - almost 3.5 times that of the figure for 2015. Such initiatives were characterized by certain irrationalities such as following suit blindly and chasing sought-after themes.
In light of such phenomenon, since late last year, authorities such as the National Development and Reform Commission, the State Administration of Foreign Exchange and the Ministry of Commerce have been making comments frequently on the supervision over overseas investments and cross-border M&A. Recently, the General Office of the PRC State Council forwarded the Guiding Opinions regarding Further Guidance and Regulation of Foreign Investment Directories, specifically proposing the restriction of foreign investments in areas such as real estate, hotels, cinemas, the entertainment industry and sports clubs.
The heightened supervision on the part of the government has shown positive results. As researches released by the Ministry of Commerce, the new direct investments in the non-financial category made by Chinese domestic investors in foreign enterprises between January and July this year amounted to US$57.2 billion, representing a year-on-year decrease of 44.3%. The external investments in the real estate sector and the culture, sports and entertainment sector have decreased by 81.2% and 79.1% year-on-year, respectively, with such investments accounting for only 2% and 1% of the total external investments for that period, respectively.
Being some of the most active entities engaged in foreign investments, A-share listed companies have also announced a series of investments, indicating the overseas investments by Chinese enterprises have become more rational and are shifting from “large-scale” to “high-level” initiatives.
——Significant decrease in the number of large-scale foreign investments in the range of 10 billion US dollars. According to statistics, the amount of most foreign investments made by A-share listed companies this year is below US$1 billion, while the proportion of those investments in the region of several hundred million or even several dozen million US dollars has increased significantly to over 70%.
Fosun Group’s Chairman Guo Guangchang said the most problematic thing about overseas investments is actually the competition with Chinese enterprises, given that the offers made by some of them are indeed unfathomable. The government’s heightened supervision related to overseas investments has proved to be highly essential and timely, and is capable of eradicating quite many irrationalities as well as potential threats to financial security.
——The majority of foreign investments are aimed at leveraging on technological advancement, industry structure upgrades, and international collaboration regarding production capacity. Taking the acquisition of German company Koller by Nanjing Iron and Steel as an example, despite the moderate scale of Koller, it possesses extensive experience in the lightweight design of cars and is a collaborative partner of a number of enterprises such as Volkswagen and BMW. Nanjing Iron and Steel’s Chairman Huang Yixin said the Chinese market has an increasingly high demand for lightweight automobile products and that the acquisition of Koller represents a strategic investment made by Nanjing Iron and Steel, which would be conducive to the company’s transformation that is tilted toward the field of new materials.
Li Ming, PwC China’s Central Region Consultancy Service Head Partner, commented that especially given the industry upgrades and “The Belt and Road” initiative, those cross-border M&A with strategic significance will dominate the overseas M&A market for 2017, and such projects will assist Chinese enterprises in fulfilling industry chain gaps.
——It is necessary to “go global”, but also to “head back home”. Currently, consumption upgrade represents one of the major drivers of China’s economy. Although the targets of many investment and M&A projects are located abroad, such projects are actually aimed at leveraging on China’s huge market driven by its internal demand.
Guo Guangchang noted those “Go Global” initiatives are often made in order to achieve better results in “heading back home”, and that a number of Chinese enterprises realizing organic growth through the integration of global resources will definitely emerge going forward. For instance, St-Hubert, the target of joint acquisition by Sanyuan and Fosun, is a very renowned health food brand in France. Upon completion of such acquisition, the two companies would satisfy Chinese consumers’ demand for healthy food through leveraging on St-Hubert’s advanced technologies and expertise as well as on Sanyuan’s channel advantages.
Huo Jianguo, Vice-President of China Society for World Trade Organization Studies, believes that in light of the issues arising from the rapid development of the overseas investments and M&A conducted by Chinese enterprises, there is a need to conduct research going forward for the perfection of new means and mechanisms related to the supervision, review and approval of overseas investments, such that those prohibited or restricted projects will be included in a “negative list” for management purposes. On the other hand, regarding the encouraged projects, authorities are obligated to continue offering the necessary favorable services and policy support, while reminding enterprises to sharpen their risk control methods for ensuring the security and sustainability of investments.
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